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The crypto world is still in its infancy and the use of decentralised tools rarely offers victims any recourse. Currently, the hackers' favourite targets are bridges, the tools that enable blockchains to communicate with each other (we'll take a closer look below). It has to be said that they have everything going for them: billions of dollars in liquidity, relatively recent use... and therefore gaping security breaches. 😬

The future of the sector will involve extremely rigorous audits of smart contracts to limit protocol flaws. Most of the major consultancies have built up strong teams in recent months. We'll soon be telling you in The Big Whale what these new, up-and-coming professions are that all companies are snapping up.

THE BIG NEWS

Our EXCLUSIVE NEWS 🗣

👉 The Ledger bank card is coming soon

Presented with great fanfare in December 2021, the Ledger bank card should be available soon. According to our information, the test phase is drawing to a close and participating users are in the process of reporting the final bugs. The card will be launched first in the UK, then in France and Germany. Called "CL" (for Crypto Life), it will enable users to spend their cryptos (via conversion into euros at the time of payment) at all payment terminals that accept Visa. So far, there's nothing really innovative here, as Binance and Crypto.com have been offering this functionality since 2020. What makes it unique is that it will allow you to open a credit line in euros when you deposit cryptocurrencies. For example: I put up an ether as collateral to obtain 1,800 euros. If I don't pay it back, the ether will be seized. As some clever people will have noticed, this feature should make it possible to avoid capital gains tax because the ether won't technically be sold (it's the sale of a crypto that triggers taxation)... 🤑 To get a better understanding of this much-anticipated product, The Big Whale will be bringing you a full test soon.

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THE BIG INVESTIGATION

♻ THE BRIDGES ♻

The missing link to connect all blockchains

By Virgile Heuraux and Grégory Raymond

👉 The news. The sector has been enriched with new tools that allow cryptocurrencies to be used on all blockchains.

👉 The background. Bridges provide a large circulation of liquidity, but are subject to major cyber attacks.

👉 Why it's important. The future of the sector depends on connecting all ecosystems. Bridges are an essential link in this "multi-chain" future.

WHAT ARE THEY USED FOR?

"Bridges are used for a variety of reasons," explains Stanislas Barthélémi, a consultant at Blockchain Partner, a specialist firm that is part of consultancy giant KPMG. "Firstly to take advantage of applications that do not work on the original blockchain of your cryptocurrencies, such as when you want to deposit bitcoin in Aave (which works on Ethereum), or to reduce the costs of using Ethereum," he continues.

In fact, it is cheaper to use the Polygon network (which consumes a few cents in transaction fees) rather than Ethereum (sometimes more than $50). With just a few clicks, a bridge allows you to convert your Ethereum cryptocurrencies into their equivalent on Polygon (for example, the stablecoin USDC).

On the other hand, bridges provide great liquidity to the sector. "Until now, liquidity has been fragmented among a large number of different blockchains, bridges are the only solution for it to be widely available," Alex Smirnov, co-founder of the decentralised bridge deBridge

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HOW DOES IT WORK?

When using a bridge, your initial cryptocurrency is not "converted". It's a bit more complicated than that. You block it in its initial blockchain, before issuing an equivalent in the protocol of your choice.

For example: I block 100 USDC stablecoins on the Ethereum blockchain to issue 99.5 USDC on the Polygon blockchain (the bridge takes a small commission to fund itself). The USDC that were on Ethereum are not destroyed, they are simply blocked in their original blockchain to ensure the value of the new tokens issued on Polygon.

Here's the Multichain bridge interface to show you how this operation works:

Now you know the basics, we can go further!

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CENTRALISED OR DECENTRALISED BRIDGE?

There are dozens of projects that act as gateways between blockchains. They are grouped into two main families. Each with its advantages and disadvantages.

Centralised bridges

This is the simplest version to understand: companies hold cryptos in a reserve, in exchange for issuing new tokens.

The best known is probably WBTC, which allows synthetic versions of bitcoin to circulate on the Ethereum blockchain. "It's the most widely used centralised bridge," Stanislas Barthélémi sums up. It was jointly created in 2018 by BitGo, Kyber Network and Ren to bring the high liquidity of bitcoin onto Ethereum. It is BitGo that handles the custody of bitcoins (currently close to $6 billion).

For Alex Smirnov, centralised bridges are not just limited to issuing companies: "We can also consider exchange platforms such as Binance or FTX as bridges, as we can easily move from one blockchain to another to withdraw assets to the targeted blockchain".

The biggest criticism that can be made is that it is essential to trust the intermediary holding the funds. As we saw with the Celsius scandal, even the biggest players are exposed to insolvency because of their sometimes relative transparency. If BitGo ever declared a loss in its reserves, WBTCs would lose their value against bitcoin.

Decentralised bridges

Users who refuse to trust centralised players (risk of bankruptcy, lack of transparency, seizure of funds by the authorities, etc.) can use decentralised bridges.The main advantage is that reserves can be audited at any time. It's the ultimate in transparency.

There are three main types of decentralised bridges.

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👉 With validators

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These bridges work thanks to a network of independent validators on which we integrate the blockchains we want to communicate.

"These bridges do what is known as "mirroring", we deposit cryptos in smarts contracts on the originating blockchain in order to issue equivalent representations that can be used on the destination blockchain. This is the model used by the official bridges of Polygon or Arbitrum," says Stanislas Barthélémi.

The main advantage of this design is that any blockchain can communicate. Ethereum can be made to interact with Solana, whereas their programming language makes them incompatible.

The main disadvantage is that the bridge must ensure its own security and this is not always up to scratch, as was the case with Wormhole ($325 million stolen in February) or Ronin ($620 million in March).

Some bridges using this technology: Multichain (MULTI), deBridge, Wormhole, etc.

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👉 With cross-chain messaging

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Cross-chain messaging protocols introduce a different technique for connecting blockchains. In a way, instead of asking tokens to move between blockchains, blockchains are asked to move tokens.

Two main solutions have been found to achieve this.

• Provide a single development kit to blockchains
  
  As all blockchains speak the same "language", they can communicate with each other and there is no need to block cryptocurrencies in one place to create them in another. This concept was popularised by the Inter-Blockchain Communication (IBC) of the Cosmos protocol, which can be found in a similar form at Polkadot.
  
  "Communication is more secure and more decentralised. But the problem with Cosmos or Polkadot is that the blockchains have to be developed using the same development kit in order to be able to communicate with the other projects," warns Alex Smirnov. So it's impossible to get Bitcoin and Ethereum to communicate, for example.
  
  Some projects interconnected via Cosmos: Osmosis (OSMO), Axelar (AXL), Evmos (EVMOS)
  
  Some projects interconnected via Polkadot: Acala (ACA), Moonbeam (GLMR), Astar (ASTR)

• Information is transmitted from one chain to another using oracles.
  
  Oracles allow data from the outside world to be added to a blockchain. This data can be prices, temperatures, or even tokens in our case. This is the case with LayerZero, which uses an oracle operated by FTX and Polygon, or its competitor Chainlink, which will shortly be launching its CCIP (Cross-chain interoperability protocol).
  
  Some projects interconnected via LayerZero: Stargate (STG), Angle.money (ANGLE)

👉 Bridges based on "cross-chain liquidity"

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These bridges adopt the principle of decentralised exchange platforms such as Curve or Uniswap. Pools of liquidity containing the same cryptocurrency spread over the two networks are fed by users.
Some bridges using this technology: Hop.exchange (HOP), cBridge, Connext (NEXT)

WHICH PROJECTS ARE THE MOST PERTINENT?

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👉 Multichain

This is the most popular decentralised bridge in the ecosystem. The total value of cryptocurrencies locked in its store is currently $2 billion ($10 billion in January). Multichain takes into account more than thirty different blockchains.

Fees are sometimes high for small transactions, but its use is fairly easy to access.

Its competitor Synapse is also popular. It offers fewer different blockchains, but its fees are more reasonable for small transactions. Connext may also be suitable for large transactions.

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👉 Hop Exchange

Hop is a bridge that uses cross-chain liquidity. It specialises in communication between the various Ethereum Layers 2, in particular those using Optimistic Rollups technology (Arbitrum and Optimism in particular).

It addresses a simple problem: as Optimistic Rollups involve waiting 7 days for a transaction to be fully validated by the network, waiting such a long time to move from a USDC Optimism to a USDC Arbitrum can prove problematic. Hop solves this problem with liquidity reserves. Users can switch from one channel to another in just a few seconds.

There are around $69 million in assets in its reserve. Hop is among the most widely used bridges for transferring funds between Ethereum's second-layer solutions. It is particularly inexpensive.

👉 Portal Bridge

This bridge developed by Wormhole (based on a network of 19 validators) is one of the few that allows you to juggle between the Ethereum and Solana ecosystems. This is a strength, because Solana is a major blockchain that lacks connections with the rest of the sector. There are around $600m of assets in its pool ($4.6bn in May).

Be wary though, Wormhole suffered a $326m hack last February.

The AllBridge solution is also a widely used option for switching between Ethereum and Solana.

👉 deBridge

Based on a network of 12 validators, deBridge emphasises its "composability", i.e. the ability to connect to other decentralised finance applications to enhance the user experience.

For example, deBridge will very soon be able to tap into Aave's liquidity to facilitate a very large transfer. It is also connected to decentralised exchange platforms to allow tokens to be sent and received from one blockchain to another in a single transaction.

deBridge has $2 million in blocked assets for $5 million in volumes over the last 30 days. Its liquidity reserve may seem low, but this is justified by the fact that deBridge uses that of other applications to carry out transfers.

👉 Li Finance

This emerging project is a bridging aggregator. Depending on the desired transaction, it suggests the fastest and/or cheapest route to the user by drawing on all the projects in the sector.

"In the same way that we have seen the emergence of exchange platform aggregators such as 1inch or Paraswap, we can also expect to see the emergence of bridge aggregators," judges Stanislas Barthélémi.

WHY IS IT RISKY?

Bridges are among the most attractive tools to pirate because of the large amounts of cash they contain. The three biggest hacks in the sector involved this type of tool. In all, more than $1.5 billion was lost over the last twelve months with Ronin ($624 million), Poly Network ($611 million) and Wormhole ($326 million).

"Bridges are a prime target because they often host a central storage space where the cryptos used to support the tokens issued on the receiving blockchain are deposited," points out Chainalysis, a US company specialising in the analysis of blockchain transaction flows, in its August report.

Bridge attacks accounted for 69% of cryptos stolen in 2022. The North Korea-linked Lazarus group alone is said to have siphoned off more than $1 billion.

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"There are two risks with their design, starting with the lack of decentralisation," insists Alex Smirnov. "Ronin used 9 nodes: you only needed to take control of 5 of them to do what you wanted with them", he points out.

The other danger relates to the smart contracts themselves: "Poly Network and Wormhole were hacked because their smart contracts had vulnerabilities that hackers exploited", recalls the deBridge co-founder.

The risk on smart contracts is multiplied when bridges offer bridges to blockchains that are a little more "exotic" (i.e. outside Ethereum). "When smart contracts are made on Solana, for example, security audits are less reliable and we lack hindsight on the technology. In the case of the Wormhole hack, the developers had not used the latest version of the software to write the smart contracts", points out Stanislas Barthélémi.

The blockchains themselves can also present a risk: "Bridges depend on the security of the blockchains they use, so we expose ourselves to the possibility of connecting less secure protocols to others, which can contaminate the entire ecosystem", warns the consultant from Blockchain Partner.

HOW CAN THIS SECTOR EVOLVE?

A few years ago, exchange platforms were by far the favourite targets of hackers. Successful attacks are now rare because these companies have focused on their security... and because hackers are turning to the newest and therefore most vulnerable services (such as bridges).

Although they are not infallible, extremely rigorous computer code audits could be a first step in limiting the phenomenon. "Over time, the most robust and secure smart contracts will serve as models for developers of future projects," Chainalysis foresees.

The bridge sector is still relatively new and no solution has yet established itself as the leader. "A very large number of projects are in competition, so there is bound to be a concentration in the medium term," believes Stanislas Barthélémi. "We should end up with a handful of players who will be able to do everything, just like the decentralised exchange platforms whose number has dwindled over time", he predicts.

In the long run, the best bridges could be integrated into our favourite applications without us even knowing it, "like the Argent wallet that uses the Paraswap protocol to trade cryptos", he points out.

For Alex Smirnov, "the projects that will prevail are those that offer the best security, the best user experience as well as the ability to manage a large number of blockchains".

THE BIG WHALE'S OPINION 🐳

Although bridges allow a large flow of liquidity between blockchains, no single major player has yet established itself, even though Multichain is currently the most popular solution. Piracy is rife and even the most respected bridges are susceptible to attacks (Wormhole, for example), especially if you leave the EVM ecosystem (Ethereum and blockchains that use its programming language such as Polygon, Binance Chain, Avalanche, Fantom, etc.).

In general, it is very risky to hold synthetic versions of tokens that do not circulate on their native blockchain. We therefore advise using bridges for one-off transactions and avoiding holding their tokens with the aim of generating returns, even if these are very attractive.

If you use bridges, test the fee preview tools of the various solutions before validating your transactions. This will help you choose the least expensive option.